Question 1

How much lower are ARM rates than fixed rates?

Accepted Answer

Typically 0.5% to 1% lower, but the spread varies with market conditions. Longer fixed periods (7/1, 10/1) have smaller discounts than shorter ones (3/1, 5/1). Compare current offers from multiple lenders, as spreads vary.

Question 2

What index do most ARMs use now?

Accepted Answer

Most ARMs now use SOFR (Secured Overnight Financing Rate) since LIBOR was phased out. Treasury indices (CMT - Constant Maturity Treasury) are also common. The index plus your margin determines your rate. SOFR tends to be more stable than LIBOR was.

Question 3

Can my payment decrease with an ARM?

Accepted Answer

Yes! If the index rate falls, your payment can decrease at adjustment time (subject to floors, if any). This is the upside of ARMs - you benefit from falling rates automatically without refinancing. However, most rate environments see increases over time.

Question 4

Can I convert my ARM to a fixed-rate?

Accepted Answer

Some ARMs have conversion options allowing you to switch to fixed-rate without refinancing. This usually comes with a fee and the fixed rate may not be the best available. Otherwise, you'd need to refinance, which has its own costs.

Question 5

What happens if I can't afford the payment after adjustment?

Accepted Answer

Options include: refinancing to a fixed rate (if you qualify), selling the home, or extending the term if the lender allows. Payment caps exist on some ARMs that limit payment increases, but this can cause negative amortization. Best to plan ahead.

Question 6

Is negative amortization possible with ARMs?

Accepted Answer

With payment-capped ARMs (different from rate caps), yes. If the payment cap prevents the payment from covering all interest due, unpaid interest is added to principal. This is rare in standard ARMs today but was common in pre-2008 'option ARMs.' Most current ARMs don't have this risk.

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